The Hungarian National Bank (MNB) issued, among others, a report that examines the state of the domestic green finance and capital markets, a report that summarizes the central bank actions over the past year in context of its mandate on environmental sustainability, and a recommendation that all domestic credit institutions and branches should switch to green operations by 2025. MNB also recommended that Revolut Bank should operate as a domestic subsidiary bank in Hungary to protect its customers.
The key highlights of the recent publications follow:
- The green finance report focuses on financial market developments on sustainability, along with the central bank's market regulation and market-shaping activities. In the report, the central bank also presents the compliance of credit institutions with the Guide on climate-related and environmental risks. This suggests that the preparedness of the banking sector is uneven and that some actors need to accelerate their preparations. The central bank will publish an addendum to its Guide on climate-related and environmental risks in Summer 2022, setting out also the deadlines for compliance with each of the recommendation items. The addendum will highlight the minimum requirements without which institutions can no longer be considered environmentally prudent this year. The report findings suggest that, in 2021 again, Hungary continues to lag behind the European Union on most dimensions of environmental sustainability, though substantial progress and growth can be seen in some areas. No significant improvement has been noted in the performance of the financial sector in the area of sustainability reporting and green bond issuance, though corporate lending in this area has increased.
- The progress report on the green central toolkit strategy, which has been published one-year after the toolkit issuance, summarizes the practical steps taken by MNB in supplementing its monetary policy with green elements since the adoption of the green toolbox strategy. The report highlights the progress made in the field of green programs and practices in the international central banking space, as well as how the frameworks and standards that form the basis of the green financial system have developed in recent months. The report analyzes in detail the impact of the central bank's measures affecting the green segment of the domestic government securities, corporate bonds, and mortgage bond market and the development of the markets, the MNB's steps to stimulate the green housing market, with particular regard to the Green Home Program, and the addition of green elements to the collateral management system. The green central bank toolkit strategy laid down the foundation for the long-term operation of the central bank's toolbox and prioritizes environmental sustainability, which provides a reference point for the integration of climate protection aspects into monetary policy practice. Despite last year's tightening monetary policy environment, MNB ensured that the monetary policy toolkit supports the transition towards sustainable development, in addition to the priority of the price stability goal.
- MNB, as part of its renewed green recommendation, expects domestic credit institutions and branches to switch to green operation by 2025. The recommendation aims to identify, measure, manage, monitor, and disclose climate change-related and environmental risks. The recommendation requires banks to develop an environmentally sustainable lending policy, which includes goals and standards that are considered sustainable for a credit institution, and to ensure that the customers are using these loans for sustainable purposes. As part of the recommendation, MNB expects credit institutions to appoint an organizational unit or a manager responsible for the management and control of climate change and environmental risks as early as 2022, with the appointee expected to regularly report on such activities to the bank management. Market players are expected to incorporate climate change and environmental risks and opportunities as early as 2022 in their strategy, business plan, and model and integrate these risks in detail in the following years. Credit institutions are also encouraged to measure direct and indirect carbon emissions related to their activities and disclose publicly the steps taken to mitigate climate change and environmental risks, in accordance with any related European Union and domestic requirements.
- MNB recommends that Revolut Bank should operate as a domestic subsidiary bank, with headquarters and capital in Hungary, and as an institution under the supervision of the Hungarian central bank, to protect its customers. Revolut Bank, which provides electronic financial services to domestic customers, does not have a domestic banking license and currently operates in Hungary as a cross-border institution. As a result, MNB will only have limited powers in the field of consumer protection because, in the event of a settlement, consumer, or deposit insurance problem, the affected domestic consumers can basically only seek legal redress in connection with their own affairs in Lithuania, where the headquarters of the parent bank is located. Despite the repeated initiatives of MNB, Revolut Bank has still not taken steps to initiate the licensing procedure for its domestic subsidiary bank and no change in the status of Revolut Bank is expected until at least the middle of 2023.
Keywords: Europe, Hungary, Banking, Lending, Sustainable Finance, Credit Risk, Climate Change Risk, ESG, Green Bonds, Revolut Bank, Fintech, MNB
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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